Tasha Kheiridden: How equalization hurts everybody

How equalization hurts everybody

Since Confederation, Ottawa has made those who work pay the freight for those who don’t. Through a multitude of schemes — progressive taxation, procurement contracts, corporate welfare, entitlement programs, and, most grandly, equalization — the federal government has redistributed income from the haves to the have-nots. This levelling is ostensibly done to provide a roughly equal standard of living to all Canadian citizens, regardless of where they live. In reality, it has served as a means of buying votes in key constituencies, particularly Quebec.

Today, six provinces count themselves as “have-nots”: Quebec, Ontario, Manitoba, New Brunswick, Nova Scotia and Prince Edward Island. Four — Alberta, British Columbia, Saskatchewan and Newfoundland-Labrador — are “haves.” The composition of these categories has varied since the equalization program was created in 1957. But one thing has not changed: Whoever the haves are, their leaders grumble that their collective noses remain at the grindstone, while the have-nots’ snouts are at the trough.

This week brought news that the federal government is — or, at least, was — considering changes to Canada’s equalization system. According to documents obtained by Postmedia news, the federal Finance department “has been examining substantial changes to the $15.4-billion federal equalization program that could dramatically affect transfers sent to provinces and their ability to pay for programs and services.”

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These include recalculating the impact of hydroelectricity production on the economies of producer provinces (most notably, Quebec), re-visiting the issue of Ontario’s “fiscal gap,” and factoring in the costs of delivering services on a region-by-region basis.

Were these changes to be made, the “losers” would be provinces such as Quebec, which charges below-market hydro rates to consumers, thereby foregoing revenue and providing a hidden subsidy to individuals and industries alike. Others provinces such as Ontario would be “winners,” because given their relatively higher wages, it costs more to deliver services there than in lower-wage parts of the country.

But whatever changes are made at the margins, a policy of equalization will continue to penalize not only the economies of the haves, but also the have-nots — by reducing the latter’s incentive to improve economic performance, lest benefits be clawed back. According to the Fraser Institute, “ ‘over-equalization’ weakens the economies of poorer provinces [because] the rich flow of funds … into recipient provinces boosts government spending, pulls resources away from the private sector, and politicizes the economy.”

Other think-tanks, such as the Atlantic Institute for Market Studies and the Macdonald Laurier (ML) Institute have come to similar conclusions. In the words of ML president Brian Lee Crowley, “Subsidizing poorly performing parts of Canada is in truth a policy of refusing to make people face the consequences of the poor policy choices they have made over the years.”

In other words, we’re not making recipient provinces richer, just entrenching the bad habits of their elites.

Equalization also does not contribute, as its supporters claim, to advancing national unity. To the contrary, it breeds resentment by have province toward have-nots, since it allows the latter to offer their citizens services that the former cannot afford. Thanks to its more than $8-billion in annually received equalization payments, for example, Quebec subsidizes $7-a-day daycare and rock-bottom university tuition. Needless to say, this doesn’t sit well with Albertans, especially when Quebec environmentalists then attack the oil sands, the very source of the wealth that’s redistributed eastward.

The current equalization formula is up for renewal in 2014 — just over a year before the next federal election. Would the current government have the political courage to scrap it? Don’t bet the farm on that one. But it might, in the name of putative “fairness,” tinker with the details, insofar as it would please the Conservatives’ electoral base in western Canada and shore up fortunes in Ontario, especially if the Liberal party shows any signs of reviving under a new leader.

Expect the pork to keep getting doled out, even if the workhorse gets an extra oats break.

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